Imagine securing a mortgage loan with rates as low as 5% or even 4%, as they were just two years ago.
This isn’t just a possibility; it’s a reality. Let’s delve into the world of mortgage assumption loans, shall we?
I vividly remember the day my husband and I sat down to sign our VA mortgage loan documents over 3 years ago. The concept of an assumption loan had crossed our minds briefly at the time, but we didn’t give it much thought. Ha! Little did we know the true significance of this type of mortgage.
What Are Assumable Mortgages?
Assumable mortgages are gaining popularity as interest rates rise. But what are they exactly? An assumable mortgage is a unique type of home loan that allows a buyer to step into the seller’s shoes and take over their existing mortgage, retaining the same, often lower, interest rate, instead of applying for a new loan. Assumable loans typically take shape as government-backed securitized loans—such as FHA, VA, or USDA loans—and come with assumable riders, allowing lenders to waive the due-on-sale clause, and permitting new buyers to assume the existing loan, hence the name “assumable”. It is important to note, the mortgage loan must be current or brought current at the time of the closing on the assumption loan.
Accelerating Equity Growth
If you’re lucky enough to cross paths with a seller who has already paid off a substantial portion of his/her mortgage (let’s say even 5- or 10-years’ worth), you can accelerate your equity growth due to the front-loaded nature of mortgage interest on fixed mortgage loans.
Benefiting from this valuable opportunity can be a challenge without the assistance of a knowledgeable real estate agent who can help you identify properties with assumable mortgages.
Assumable Mortgages as Assets
I recently spoke with Vylla’s Jennifer Silletto, a seasoned real estate agent with over 21 years of experience, on this very topic. She further emphasized what I’ve come to realize as true: these assumable loans are now considered “assets” for sellers. Ms. Silletto mentioned these types of loans are becoming part of how some sellers are now marketing their properties to attract a larger pool of potential buyers.
Navigating the Assumption Process
Closing an assumption loan can be time-consuming. An underwriting friend who specializes in assumption loans on the servicing side explained that the process can sometimes take (eek) six months. Multiple parties are involved, including a credit review by the current loan servicer (holder of the mortgage loan) to determine why the seller wants to have his/her loan assumed and the credit qualification of the new buyer. Additionally, there’s an additional review by the government agencies—Department of Veterans Affairs (VA), Federal Housing Administration (FHA), or the US Department of Agriculture (USDA)—depending on the specific loan type.
While locating assumable loans is often a challenging feat, certain companies assist in navigating the assumption process for an extra fee. It’s advisable to compare their costs since they can vary.
The Pros and Cons
Pros:
- Lower closing costs: An advantage of an assumption loan is the lower closing cost fees with the current servicer because the original borrower has already covered the upfront fees typically associated with these types of loans at initial purchase/refinance.
- Lower Interest Rate: Assumable loans can offer lower mortgage interest rates than the current market rates creeping to 8% or more in some instances. This is, of course, an enticing prospect for budget-conscious homebuyers.
Cons:
- Time-consuming: The assumption process is unfortunately time-consuming (as previously mentioned). Beyond additional approvals needed from the VA, FHA, and USDA, the current servicer must evaluate the necessity for the borrower to sell and allow assumption. The new buyer, meanwhile, must meet credit qualification criteria, and a substantial down payment may be necessary.
- Assumption Gap: Now, let’s discuss the assumption gap, which is the difference between the assumable mortgage amount and sales price. For example, if the sales price is $500,000 and the current mortgage balance is $450,000, the assumption gap would ring in at $50,000 (that’s $500,000 minus $450,000). This gap may require a cash down payment unless a lender is willing to offer a second mortgage loan for bridging purposes. Keep in mind the fees charged by the second mortgage company could offset the benefits of the lower-cost fees on the first mortgage loan being assumed (say that five times fast).
Wrapping Up
While you’ll of course need to consider all associated trade-offs, you’re now armed with an additional option to weigh as part of your homeownership journey.
Take time to assess whether an assumable loan aligns with your family’s financial goals. This knowledge can empower you to make a more informed decision before finalizing your real estate transaction and mosey on over to my previous article, “Successfully Navigate Your Dream Home Closing,” to glean insight into steps you can take to find the best lender for your needs.
Wishing you all the best on your path to homeownership!
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